Analysis: how fixed-rate mortgages influence savings interest rates

Directly comparing current interest rates on customers’ savings deposits with those on new mortgages is not a valid way to gauge whether they are fair. The Swiss Bankers Association (SBA) has already stressed in an opinion piece published on 10 March 2023 that only the average interest rate across all types of loans is relevant to savings interest rates, and this lags behind mortgage rates. In addition, statistics from the Swiss National Bank (SNB) show that banks’ interest margins contracted during the low-interest phase.

An analysis recently commissioned by the SBA (only available in German) sheds light on the interplay between mortgage and savings interest rates. It was carried out by the consulting firm Orbit36, which specialises in strategy, risk management and treasury management for banks. The focus of the analysis is on estimating interest margins on mortgages (assets) and savings (liabilities) with the aid of model calculations and data in the public domain. Orbit36 starts by examining the two sides of the equation separately and then calculates the gross margin as the difference between interest income and interest expense.

Mortgages with a very long term of ten years or more grew massively in popularity while rates were low, whereas demand for variable-rate mortgages based on money market rates such as LIBOR and SARON was weak. The analysis reveals that the average interest rate across all mortgages provided by banks in Switzerland is very low and locked in for the long term. This means that the interest banks are earning on their mortgage portfolios has only been increasing in small steps since the turnaround in rates, which has a direct impact on the liabilities side by severely restricting their scope for paying interest on savings deposits. The balance is key here: higher mortgage rates on the assets side only apply to mortgages the bank has newly granted or extended and are thus not a decisive factor in determining savings interest rates on the liabilities side because these normally apply to all deposits.   

The model calculation used in the analysis makes it clear that the interest margin on customer deposits was pushed into negative territory during the phase of negative SNB rates that began in 2015 because the latter could only be passed on to savers to a limited extent, if at all. Banks’ scope for offsetting this negative margin with a higher margin on mortgages was also limited. According to Orbit36’s model calculation, therefore, Swiss banks’ interest margins contracted by around 20-30 basis points after negative rates were introduced. Only when the long-overdue turnaround came in 2022 did margins gradually return to the levels seen prior to the negative interest phase.

The model calculation also shows that banks actually began raising interest rates on savings sooner than the model had suggested, reflecting intense competition between them. The resulting market momentum is easy to see at present. A number of banks announced further rate increases after the SNB’s most recent decision on rates on 23 March 2023.

Another indicator of fierce competition is the vast range of interest rates offered on savings, which the banks are using to attract inflows. Banks that are targeting growth in lending tend to have a higher requirement for new money. Others, meanwhile, still have a deposit overhang, which is why they are more cautious in their response to interest rate changes. Overall, however, savings interest rates are in a clear upward trend, which is good news for savers and banks alike.